Draft for Limited Circulation Only ITC CHOUPAL FRESH: A CASE IN PRO POOR VALUE CHAINS Introduction: The Growth Oriented Microenterprise Development (GMED) Program 1 was initiated in September 2004 at a time when the transformation of India’s retail sector had just started. Between 2005 and 2007 India consistently topped AT Kearney’s Global Retail Development Index 2 ranking, based on criteria such as market saturation, investment profile etc. By 2006 single brand retailers were allowed to own the majority stake of 51% in a joint venture with a local company. Since only single brand retailers were given this opportunity, this provided a space for Indian companies like Reliance, Subhiksha, Foodland etc to take advantage of the high growth groceries market. But this was only the beginning. Organising fresh produce supply chains are the most challenging aspect of groceries retail. Ensuring that the customer has the same product, in the same quality, at the same place, fresh and at the any time during the year presents a tremendous challenge. Especially so in a context where numbers of large farmers are limited, and organising small ones to reach scale and reliability of supply, notoriously high cost and risky. What is one Indian company ITC doing to make the best of this situation? This case presents one way of supporting the development of a value chain that can integrate, potentially, over 125,000 smallholder farmers. For the purpose of this case study, value chain is defined as all the firms that buy and sell from each other in order to supply a particular set of products or services to final consumers. (Lusby, 2007). The study uses value chain analysis 3 with a view to highlighting three aspects in the case namely 1) which activities/types of firms/strategies yield higher value than others 1 The program is funded by the United States Agency for International Development and implemented by ACDI VOCA. 2 For the past four years, A.T. Kearney has published the Global Retail Development Index (GRDI), a survey to help retailers prioritize their global development strategies. The survey is recognized globally as a key indication on retail investment climate and opportunities. For feedback contact: Rewa Shankar Misra [email protected]1 3 The case is based on interviews with GMED project staff, and primary data available with the GMED.
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Draft for Limited Circulation Only
ITC CHOUPAL FRESH:
A CASE IN PRO POOR VALUE CHAINS
Introduction:
The Growth Oriented Microenterprise Development (GMED) Program1 was initiated
in September 2004 at a time when the transformation of India’s retail sector had just
started. Between 2005 and 2007 India consistently topped AT Kearney’s Global
Retail Development Index2 ranking, based on criteria such as market saturation,
investment profile etc. By 2006 single brand retailers were allowed to own the
majority stake of 51% in a joint venture with a local company. Since only single
brand retailers were given this opportunity, this provided a space for Indian
companies like Reliance, Subhiksha, Foodland etc to take advantage of the high
growth groceries market.
But this was only the beginning. Organising fresh produce supply chains are the most
challenging aspect of groceries retail. Ensuring that the customer has the same
product, in the same quality, at the same place, fresh and at the any time during the
year presents a tremendous challenge. Especially so in a context where numbers of
large farmers are limited, and organising small ones to reach scale and reliability of
supply, notoriously high cost and risky. What is one Indian company ITC doing to
make the best of this situation?
This case presents one way of supporting the development of a value chain that can
integrate, potentially, over 125,000 smallholder farmers. For the purpose of this case
study, value chain is defined as all the firms that buy and sell from each other in order
to supply a particular set of products or services to final consumers. (Lusby, 2007).
The study uses value chain analysis3 with a view to highlighting three aspects in the
case namely 1) which activities/types of firms/strategies yield higher value than others
1 The program is funded by the United States Agency for International Development and implemented by ACDI VOCA. 2 For the past four years, A.T. Kearney has published the Global Retail Development Index (GRDI), a survey to help retailers prioritize their global development strategies. The survey is recognized globally as a key indication on retail investment climate and opportunities.
6 The average size of land holdings in the GMED project is ranges from 2.5 to 3 acres depending on the region, which borders definitions of small and semi medium categories.
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Organised retailing and the success of brands such as Naamdharis, Choupal Fresh7,
and others are a trigger for value chain development in the fresh fruits and vegetables
sub sector in India. Private partnerships can play a key role in creating farm to fork
linkages that can, on the one hand, satisfy the market demands for high quality and
safe food, while retaining smallholders in the value chain. While the private sector in
India has been fast to enter organized retailing and most have definite plans for at
least some kind of linkage, relatively few companies are actually reaching the farm
gate.
“When we first started there was no established model.” Donald Taylor, Chief of
Party, GMED India. “And it was a hard sell to get anyone interested in working with
smallholders”. Most major organized retailers followed a cash and carry and
wholesale approach to procurement. In the Indian context this might include direct
procurement from local markets or mandis, or private agents at collection points such
as warehouses. This is partly induced by regulation but is also about the costs and
complexity of developing a farm to fork chain. The result is lack of control on volume
or quality for the retailers, and lack of access to potential market opportunities for
farmers.
What are the constraints along the chain? Existing policy measures have adversely
impacted agricultural marketing, particularly the Agricultural Produce Marketing Act
(APMA). The APMA is enacted and administered at the state level. It requires all
agricultural produce to be purchased only through state government-operated markets
(mandis), although a number of exceptions are currently being made by several states.
As originally structured, the APMAs typically bar farmers from selling produce
directly to private buyers. The purpose of regulation of agricultural markets was to
protect farmers from the exploitation of intermediaries and traders and also to ensure
better prices and timely payment for his produce. “Over a period of time these
markets have, however, acquired the status of restrictive and monoplistic markets,
providing no help in direct and free marketing, organized retailing, smooth raw
material supplies to agro – processing, competitive trading, information exchange and
7 Namdhari is a seed company and retailer with contract farming scheme for local and export markets. Namdhari Fresh and Choupal Fresh are the Retail and wholesale stores for Fruits &Vegetables owned by Namdhari and ITC respectively.
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adoption of innovative marketing systems and technologies”.8 Under the APMC Act,
only State Governments are permitted to set up markets. Farmers cannot sell their
produce directly in bulk except on retail basis to the consumers and have to bring their
produce to the market yard.
The Ministry of Agriculture developed a Model Marketing Act in 2002. The Act
permits direct sales by farmers, provides for contract farming and incorporates other
provisions further liberalizing agricultural marketing. The states are being encouraged
to replace the APMC with the model Act and some like Karnataka, Maharashtra,
Punjab are either proceeding to or already have amended current Acts. However there
is considerable resistance at the state level to adopting the new Act in full. This is
mainly due to concerns about loss of state revenue from purchase taxes.
On the other extreme of the chain, smallholder farmers are handicapped because of
fragmentation of operational holdings, limited market surpluses, and the perishable
nature of high-value food commodities. Food retailers have developed elaborate
standards relating to pesticide residues and traceability, of which smallholders are
usually ignorant. Smallholders also lack information on prices, grades and standards
required by supermarkets, and sanitary and phytosanitary measures under the World
Trade Organisation guidelines. These factors substantially raise transaction costs and
market risks for both retailers and smallholders in jointly tapping the opportunities
presented by high-value agriculture.
Agriculture is a state subject in India and the main extension agency is the state
Department of Agriculture (DoA). All states have a separate DoA. Sometimes a
separate Department for Horticulture may exist and offer extension services. DoA is
responsible for the provision of field staff for extension. The Department of
Agriculture and Co-operation of the central Ministry of Agriculture has a separate
Division of Extension which lays down major policy guidelines on extension matters.
The World Bank funded Training and Visit (T&V) system of extension supplemented
these efforts starting from the 1980s. However over time, and as the Finance Minister
10 Growth-oriented microenterprises are microenterprises which have the ability to provide jobs and grow in scale, a process critical to India’s development. Growth-oriented enterprises (GMEs) sit between traditional micro-enterprises, in India largely defined as household income support, and small businesses. (www.acdivoca.org)
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access to services such as extension, processing, finance etc. for farmers as also for
the marketing of produce.
Figure 1: Map of Punjab showing Malerkotla
Malerkotla
While initiating the program in Punjab the first step was to mobilize farmers. Due to
the short production cycle of fresh vegetables, farmers are able to see a quick return
on their investments. Malerkotla, in particular was traditionally a source of
vegetables. However, due to a previous bad experience with the private sector (see
page 14) there was initially a reluctance in working with ITC. These were gradually
overcome when GMED India and ITC offered extension services support.
Initially Malerkotla farmers said they would only grow vegetables as GMED
suggested on one half of their farm and on the other half would follow regular
methods to grow vegetables. Gradually, as they began to see greater returns and
consistent technical support they switched to using their entire operational holdings For feedback contact: Rewa Shankar Misra
for vegetable cultivation in the way GMED suggested. While many farmers were not
initially convinced that this was the way to go, the experience of this initial phase and
increasing returns to participant farmers will surely contribute towards their
involvement in the future.
“The farmers did not understand the concept of free extension services. They were so
used to bad quality government extension services or private services conditional on
input purchases. After one season however their trust grew. In fact extension services
became the key incentive for farmer loyalty.”11 GMED staff introduced a series of
simple but effective changes in production techniques. Introducing tray nurseries to
ensure a uniform crop, improve survival rates and productivity, introducing raised
beds, also shade nets for crops like tomatoes and cucumbers were just some of the key
changes introduced.
In addition the project brought in improved seed varieties, and other inputs. Farmers
were also trained in practices such as using expensive inputs like seeds judiciously
which sometimes helped cut the cost of operations by one-third.
For example, farmers were sowing 900 gms of cucumber seed per acre (price Rs. 12000/kg) while the recommended seed rate is 300 gms only. Farmers were using twice the fertilizer required and same was true for irrigation (more electricity consumption and labour) and pest and disease control (pesticide cost and application cost). Farmers were investing more owing to lack of awareness. After soil testing extension staff recommended an appropriate fertilizer dose and farmers were trained to decide upon threshold limit of pest and disease management resulting in less fertilizer and pesticide use. The approach taken was to inform farmers of the pros and cons of different varieties and input suppliers and letting them choose what suited them.
Benefit also accrued to the farmer as they used improved techniques like improved
variety, plug tray nurseries, raised bed, etc.
GMED farmers also earned more because they were able to supply early and late in
the season fetching better price. GMED farmers were 15 days ahead of other farmers
11 GMED India Deputy Chief of Party, Deo Dutt Singh
By the middle of 2006 word had spread and in the nearby village of Jamalpur Mohammad Ashraf found most farmers interested in getting involved in the GMED project. Raising initial investments was not easy and he depended on a loan from his relatives for the same. Now he has leased in an additional acre of land taking it to a total of 2.2 acres and sunk a borewell. Mohammad Ashraf feels motivated and confident about the ITC linkage and states that he is keen to be a loyal supplier to that company on account of the extensions services it regularly provides.
the high risk relating to non enforceability of contracts for both the farmers and the
company.
Ultimately a purely market based ‘arms length’ relationship has worked well for
Malerkotla farmers, where they have to a very great extent assured returns, but also
the option to revert to the traditional mandi, or any other procurer if they so choose.
This highlights critical lessons that can be compared with those emerging from
elsewhere in the world. Research on the UK-Africa horticulture chain for example,
suggests that small growers19 are marginalized where there is a contractual
relationship. The reason, being the lead firms’ sourcing strategies20, which are
influenced by the expectations of consumers, NGOs and government agencies with
regard to safety and environmental and labour standards (Dolan, Humphrey and
Hariss-Pascal: 1999).
Even as pricing and procurement has been decided within the framework of an arms
length relationship, the lead firm has gone one step further and actually supported
producers with technical services. This is atypical of arms length purely market based
relationships and opens an area of future study as to whether extension services can,
in the absence of contracts, prove to be an effective way of incentivising supplier
loyalty.
What can further facilitate greater transparency within the value chain and improve
the bargaining power of farmers are initiatives such as using information technology
to develop a platform for exchange of information and data. ITC has been particularly
progressive on this front with earlier initiative like e choupal. Infosys and GMED have
now started the first phase of a design program for an ICT-enabled technical horticulture
farmer information and supply chain management service program.
19 Vegetables included asparagus, artichoke, snap peas, beans etc. While the study related to export chains, its understanding of chain governance is critical even where the lead firms and suppliers are local or domestic. In the Indian context for example, initiatives like grading, sorting are still new to farmers and are essentially up front an impetus from the lead firm. 20
Market SystemSource: S.Raghunath, Delivering Simultaneous Benefits to the Farmer and the common man: Time to unshackle the agricultural produce distribution system – June 2004.